FX168 Financial News Agency (Asia Pacific) According to Bloomberg, due to the continuously declining Chinese stock market and real estate market, wealthy Chinese investors are flocking to the $1.7 trillion private credit market. Despite warnings of increasing default rates, they are ignoring the risks because some of the trades offer returns exceeding 20%.

Hong Kong-based large family offices like Nan Fung Trinity are following global peers by increasing investments in alternative assets offered by companies such as Blackstone Group and Apollo Global Management. Wealth management firms like Carret Private Investments Ltd. and other companies are investing in direct private credit transactions, with some trades offering returns exceeding 20%.

(Source: Bloomberg)

According to sources, amid strong demand, UBS Group's wealth management division is promoting various private credit funds to Asian clients, including funds managed by CVC Capital Partners Plc and Blackstone Group.

Meng Zhou, head of the private investment team at Nan Fung Trinity, a subsidiary of Nan Fung Group in Hong Kong, stated: "The interest of wealthy investors in private credit is definitely growing."

He explained that since 2023, "we have begun to reevaluate private credit."

Although private credit has become an alternative to bank loans for many borrowers and is thriving globally, opportunities for private credit are limited in Asia where bank capital has traditionally been abundant.

On Tuesday, September 25, there was a rebound following the central bank's introduction of a series of economic support measures. These policies include reducing borrowing costs for mortgage loans of up to $5.3 trillion and providing at least 800 billion RMB, equivalent to $114 billion, in liquidity support for the stock market.

One of the reasons investors are attracted to private crediting, according to Zhou, is that they can obtain a return of 11-12% from priority loans with collateral guarantees, and get cash returns faster than private equities.

A survey conducted by Deloitte and the Rockefeller Family Office shows that 25% of Asian family offices plan to allocate more funds to private debts and direct loans this year (the same proportion globally), surpassing other asset classes such as fixed income and private equities.

Zhou further explains, "The current financing environment is challenging, so many general partners are turning to funds from private wealth or family offices to fill this gap."

He stated that Nan Fung Trinity mainly invests in funds that provide loans focusing on leveraged buyout transactions led by private equity companies.

Carret, a wealth management company composed of former private bankers, where the managing partner and co-founder Kenny Ho mentioned that the company has invested approximately $0.4 billion in various funds and private crediting transactions this year.

He further mentioned that the return on private crediting investments ranges between 14% and 22%. Over the past 8 years, Ho's company has helped wealthy individuals invest nearly $1 billion in luxury homes in Hong Kong.

Default rates are rising.

Despite lucrative returns, private crediting lacks liquidity compared to the public debt market, resulting in significant losses if investors seek quick exits. Funds have fewer obligations to disclose holdings and investment performance compared to similar funds traded publicly.

Regulatory agencies are also strengthening scrutiny on the flow of private credit capital, with profits declining for investors while default rates are rising. Patrick Dennis, Co-CEO of Davidson Kempner Capital Management, stated at a forum last week that the private credit default rate is about 3-5%, partly due to defaults and contract modifications.

Initially supported by the Tsang family in Hong Kong, Winland Wealth was a single-family wealth management office that now absorbs funds from external clients. With better choices in the money market, the company reduced its investments in private debt a few years ago.

"The risk lies in the integrity of the borrowers," said Keith Wong, the CEO of Winland.

Winland provides trade financing for manufacturing companies at a yield of around 7-8%, and funds for working capital at a yield of 10-11%.

However, high net worth individuals still have a strong interest in alternative assets.

DBS Group Holdings Limited stated that this year its semi-liquid fund products in the Greater China region have seen a surge in sales by 300%. These funds are usually subject to redemption restrictions to avoid forced sale of illiquid assets.

Zhou from Nan Fung Trinity mentioned that the company only invests in so-called closed-end strategies, where investors cannot withdraw funds before the general partner returns capital. He mentioned that although semi-liquid funds have better liquidity, returns are often lower to compensate for liquidity.

He also pointed out, "We believe that investors should closely examine the terms of the transactions and any liquidity restrictions when subscribing to semi-liquid or illiquid funds to ensure they fully understand what they are signing."